Ohio Supreme Court Addresses Waiver of the Right to Arbitrate in the Putative Class Action Context

In Gembarski v. PartsSource, Inc. (Slip Opinion No. 2019-Ohio-3231, decided Aug. 14, 2019), the Supreme Court of Ohio clarified the standards for waiver of the right to arbitrate in the class action context where only unnamed putative class members but not the single named plaintiff had agreed to arbitration. The court ultimately concluded that the employer did not waive the right to raise the “arbitration defense,” and that not raising arbitration in the answer had no impact on the company’s ability to challenge Civil Rule 23 issues at class certification.

The Background

In October 2012, Edward Gembarski brought a class action against his prior employer, PartsSource, claiming breach of contract, unjust enrichment, conversion, equitable restitution, constructive trust and “money had and received.” PartsSource filed an answer denying the class action allegations and that the action could proceed as a class action. Nearly three years later, in September 2015, Gembarski, for the first time, sought class certification.

The trial court referred the case handling to a magistrate. PartsSource opposed the motion to certify, arguing, among other things, that Gembarski could not meet the typicality or adequacy requirements for certification because those putative class members who signed arbitration agreements could not be part of the class. In response, Gembarski maintained that PartsSource knew of its claimed right to arbitrate at the beginning of the action yet failed to assert any “arbitration defense.”

Ultimately, both the Portage County Court of Common Pleas and the Eleventh District Court of Appeals found for Gembarski. The appellate court concluded that PartsSource “was aware of its right to assert the arbitration defense from the inception of the underlying class action.” 2017-Ohio-8940, 101 N.E. 3d 469, ¶ 66. The appellate court also concluded that PartsSource’s “failure to assert the arbitration defense in its answer, or a supplement thereto, or seek to enforce the right to arbitration at some point prior to its opposition to the certification was fundamentally inconsistent with its right to assert the defense.”

And, according to the court, the magistrate’s conclusion that PartsSource waived its arbitration defense to the Rule 23 typicality and adequacy requirements was not unreasonable. Consequently, the appellate court concluded that the Rule 23(A) typicality and adequacy requirements were met.

Ohio Supreme Court Analysis

Justice Patrick F. Fischer, writing for the court, reversed. He found that the case presented “one overarching question”:

[I]n a class-action proceeding, at what point does a defendant waive the argument that the named class member does not satisfy the typicality or adequacy requirements under Civ. R. 23(A) when that named class member is not subject to an arbitration agreement that was entered into by most unnamed putative class members? ¶ 18.

The ultimate answer to that consequential question was notuntil the class certification stage. In reaching its conclusion, the state Supreme Court determined that the lower courts improperly “merged” the analysis of arbitration as a response to an action and arbitration as an “attack” on the plaintiff’s compliance with Rule 23(A). ¶¶ 21, 22.

The state Supreme Court first examined if PartsSource was required to raise arbitration in its answer pursuant to Civil Rule 8(B). It found that there was no dispute that the parties had no right to arbitrate because there was no arbitration agreement between them. Hence, PartsSource had no obligation to raise a defense that did not even apply to Gembarski. The operative question was whether PartsSource had to state in its answer a defense to unnamed putative class members who had arbitration agreements. The court also answered that question in the negative, finding that “[u]nnamed putative class members are not parties to the action prior to certification; thus, PartsSource did not need to raise defenses that would be applicable against only those unnamed putative class members who were merely potential future parties.” ¶ 28. (Emphasis in original.)

Next, the court examined the related question of whether PartsSource had an obligation to specifically raise its arbitration-related Rule 23 objections to class certification other than as a denial in its answer. Again, the court found PartsSource “had no duty beyond denying the averments in Gembarski’s complaint to raise the Civ. R. 23(A) argument.” PartsSource’s denial was sufficient to make Gembarski aware of PartsSource’s position on class certification.

Nor was PartsSource required to move to strike the class allegations to retain its Rule 23 arguments at class certification time. Neither Civil Rule 12 nor Rule 23 requires such a motion. And Gembarski, not PartsSource, had the obligation to meet the class certification requirements.

Finally, the Supreme Court of Ohio found PartsSource raised its Rule 23 argument at precisely the right time – class certification. Gembarski could demonstrate no typicality or adequacy because he was not covered by the arbitration agreement to which most putative class members were parties. Thus, the case was remanded to the appellate court to consider PartsSource’s assignments of error based on the opinion.

BakerHostetler filed an amicus curiae brief and argued on behalf of the Ohio Management Lawyers Association for PartsSource in Gembarski.

Next Steps

The law continues to develop at the intersection of arbitration and class actions. Recently, the Eleventh Circuit issued an opinion declaring that prior to class certification, “any plaintiffs beyond those named in the complaint are speculative and beyond the reach of the Court’s power” with respect to enforcement or nonenforcement of arbitration agreements. We blogged that decision here.

But notwithstanding these beneficial developments in waiver and class action law, employers must be vigilant and raise the existence of arbitration agreements at their earliest opportunity. Listing arbitration among other separately stated defenses in the answer is usually not a hardship, and certainly puts plaintiffs and the courts on notice of potential future issues. In the class or aggregate litigation context, potential defenses should be investigated and identified as soon as possible.

BOTTOM LINE

A defendant does not waive the right to raise arbitration by not addressing it in the answer to a single plaintiff’s complaint when that plaintiff is not covered by an agreement and when only unnamed putative class members are covered.

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